Central Banks Coordinate Move To Ease Credit Crunch
The markets are up big this morning on the news that a group of the world's largest central banks have coordinated a liquidity injection into the banking systems to help ease the tightening credit conditions that we have been talking about of late.
The action included the Bank of Canada, Bank of England, Bank of Japan, the ECB, the Swiss National Bank, and the Federal Reserve. They said, "The purpose of these actions is to ease strains in the financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and to help foster economic activity".
The central banks agreed to lower the pricing on U.S. dollar liquidity swap arrangements by 50 basis points. This is intended to help foreign banks who where having difficulty with short-term funding in the market.
Investors are viewing this as a positive sign that the central bankers learned their lessons from 2008 and appear steadfast in their intention to be proactive in avoiding another credit crunch and banking crisis.
Additionally, there was some positive economic reports in the U.S. The ADP Employment report showed payrolls increased by 205,000 in November, far more than the 125k consensus. Moreover, last month's payrolls data was revised upward to 130,000 gain. The Chicago PMI report also improved to 62.6 in November from 58.4 the prior month. So that is a good indication that manufacturing activity continues to expand.
Europe's markets are sharply higher this morning, and the Dow is up over 400 points so far. The euro is also higher which is boosting commodities. Copper prices are up 6%, silver is rallying, gold prices are $30 higher above $1750, and oil prices are back above $101.
The 10-year yield is up to 2.09% today; and the VIX is down nearly -9% to 28.0, though it has already bounced higher from its earlier lows. At the end of October it was below 25, so it still has some room to move lower if this rally is to have legs.
Trading comment: This is already a big move. The time to buy was last week, when bearish sentiment was on the rise and the market was extremely oversold. When those two combine (bearish sentiment and oversold technicals) it is usually a good setup for a market bounce. Then you just need a catalyst to spark the buying, which is what we got today with the central bank action. From last Friday's close, the SPX is already up 7%. I wouldn't chase today's strength, but I think you can continue to buy dips in here.